I’ve blogged a couple of times about the potential impact of the tax provisions of the Inflation Reduction Act on M&A transactions. This Cooley blog looks specifically at the potential impact of the 1% excise tax on stock buybacks on SPAC redemptions. This excerpt describes how the excise tax might come into play in a de-SPAC transaction:
The excise tax may be applicable to a US SPAC, including a non-US SPAC that domesticates to the US in connection with a deSPAC transaction, to the extent holders of publicly traded SPAC stock exercise their rights to be redeemed after December 31, 2022 (and the netting rule does not fully eliminate the excise tax). Non-US SPACs that do not domesticate to the US generally should not be subject to the excise tax.
Note: Pending further guidance, it appears that redemptions by a non-US SPAC of its stock prior to a domestication would not cause the SPAC to be subject to the excise tax, but redemptions after a domestication could subject the SPAC to the excise tax.
If a deSPAC transaction is structured such that the SPAC does not issue a significant amount of stock in the transaction, the deSPAC transaction may not produce significant offsetting stock issuances to mitigate the excise tax under the netting rule. For example, a deSPAC transaction that is structured as an “UP-C” or a “double dummy,” or in which the operating company is in form the acquirer of the SPAC, may not result in significant stock issuances that could be netted against redemptions. In addition, as mentioned above, if stock issuances do not occur in the same taxable year as the relevant stock repurchases, such issuances would not reduce the associated excise tax under the netting rule.
The blog also says that the excise tax may come into play if a SPAC decides to liquidate, and recommends that companies considering that option before the end of 2022, which the excise tax goes into effect. It also says that it may be possible to structure liquidating distributions to stockholders in such a way that they are not considered redemptions “if and to the extent provided in forthcoming guidance.”
Drag-along rights entitling the lead investor to compel other investors to participate in a sale transaction are a common feature in stockholders’ agreements for private equity deals. But the decision concerning whether or not a lead investor should exercise those rights can be more complicated than you might think. This Wilson Sonsini memo provides an overview of some of the things to think about when deciding whether to exercise those rights and whether they apply to a particular transaction.
Here’s an excerpt on some of the fiduciary duty issues that might be implicated if the exercise of drag-along rights requires board approval:
Drag-along provisions typically require a subset of the seller’s stockholders to approve the exercise of the drag-along rights, but many also require the approval of the seller’s board of directors. If the per share consideration in the transaction is not being allocated to shares of common stock and preferred stock equally, or there are other conflicts that could lead to a higher standard of judicial review in a stockholder suit (as detailed in cases such as In re Trados Incorporated Shareholder Litigation), the triggering of the drag-along rights could result in a claim for breach of fiduciary duty against the seller’s board of directors. In one decision (In re Good Tech. Corp. Stockholder Litig.), at least based on the facts before it in a breach of fiduciary duty claim, the Delaware Court of Chancery determined that it would ignore the exercise of the drag-along rights and the protections it affords.
The memo discusses a variety of other considerations, including whether the terms of the deal align with the terms of the drag-along rights and the importance of ensuring that the drag-along rights are exercised properly in order to avoid appraisal rights in the event that there is ambiguity concerning this issue in the terms of the rights. It also offers practical advice on how to help decide whether or not to exercise the rights.
Our latest Deal Lawyers Download podcast features my interview with Hunton Andrews Kurth’s Steve Haas on bylaw amendments that companies should consider in response to the universal proxy rules. Topics addressed in this 12-minute podcast include:
– Why should companies think about amending their bylaws in response to universal proxy?
– What specific bylaw changes should be made to ensure that the bylaws aren’t inconsistent with the universal proxy rules?
– What changes to nomination procedures and advance notice bylaws should be considered?
– Are there Delaware law changes that companies may want to consider addressing through bylaw amendments?
If you have something you’d like to talk about, please feel free to reach out to me via email at john@thecorporatecounsel.net. I’m wide open when it comes to topics – an interesting new judicial decision, other legal or market developments, best practices, war stories, tips on handling deal issues, interesting side gigs, or anything else you think might be of interest to the members of our community are all fair game.
Earlier this year, Weil issued a survey highlighting the key terms of 2021 sponsor-backed going private deals. The survey covered 23 U.S. sponsor-backed going private transactions announced between January 1, 2021 and December 31, 2021 with a transaction value of at least $100 million. Here are some of the key findings:
– Despite the increased use of tender offers in 2020, tender offers continued to be a relatively unpopular option for sponsors in 2021, as tender offers were used in only 13% of the surveyed going private transactions (as compared to 45% of the surveyed going private transactions in 2020).
– The “specific performance lite” construct (sometimes referred to as conditional specific performance) continues to be the predominant market remedy with respect to allocating an acquirer’s financing failure and target’s closing risk in sponsor-backed going private transactions. In fact, in a significant increase from last year, the use of the specific performance lite construct increased from 75% of the surveyed going private transactions in 2020 to 91% of the surveyed going private transactions in 2021.
– Full specific performance was not available to any of the targets in the surveyed going private transactions in 2021, which represents a significant decrease as compared to 25% of the surveyed going private transactions in 2020 where full specific performance was available.
– Reverse termination fees appeared in 100% of the surveyed going private transactions in 2021 (as compared to 85% of the surveyed going private transactions in 2020). The mean single-tier reverse termination fee that would have been payable by sponsors in certain termination scenarios was 7.2% of the equity value of the target, which represents an increase from the mean single-tier reverse termination fee of 6.6% of the equity value of the target in 2020.
The survey also found that the use of “go shop” provisions rebounded sharply last year. Go-shops appeared 43% of the surveyed 2021 deals, compared to only 10% of the deals surveyed in 2020.
Michael Levin recently shared via Twitter an example of universal proxy cards used by participants in what’s apparently the first contested election to be conducted under the new rules. Here are the preliminary proxy materials filed by Apartment Investment and Management Company, and here are the materials filed by the dissident group. Michael’s tweet includes a link to his TAI newsletter discussing the filings, which provides some interesting insights into the contest & the filings themselves. Here’s an excerpt:
First, the proxy cards recommend how shareholders vote, in addition to properly distinguishing between the AIM and L&B nominees. The SEC rule was largely silent as to how the proxy card (not the proxy materials) should set forth specific voting instructions. We expect to see more companies and activists to test the boundaries of what the SEC will allow them to put on a proxy card.
Second, both of the AIM and L&B proxy statements include a curious statement. AIM’s appears in the Q&A section (p. 5), with a similar idea in the letter to shareholders:
If I want to vote for one or more of Land & Buildings’ nominees can I use the WHITE universal proxy card?
Yes, if you would like to elect some or all of Land & Buildings’ nominees, we strongly recommend you use the Company’s WHITE proxy card to do so.
L&B states (p. 17):
Any stockholder who wishes to vote for one of the Company’s nominees in addition to the Land & Buildings Nominees may do so on Land & Buildings’ BLUE universal proxy card. There is no need to use the Company’s white proxy card or voting instruction form, regardless of how you wish to vote.
[emphasis theirs in each excerpt]
Why would each acknowledge that shareholders might vote for the other’s nominees, and suggest they could do so using their own proxy card? We’d think they would do everything it could to discourage this. It appears each wants to receive as many proxy cards as it can. They can thus track which shareholders have already voted. If AIM receives proxy cards with votes for L&B nominees, and L&B for AIM nominees, then each can easily contact those shareholders, and attempt to persuade them to change their votes. Clever…
With higher borrowing costs, squishy valuations & exits harder to come by, this Institutional Investor article says that private equity sponsors are eschewing platform deals in favor of smaller, “bolt-on” acquisitions to grow the businesses of their portfolio companies:
As borrowing costs spike and exits get harder, private equity firms are increasingly buying smaller, specialized companies that can be bolted on to existing holdings. Over the last year, these smaller add-on acquisitions have become a bigger part of the mergers and acquisitions market. According to several consultants, the strategy has always piqued the interest of lower-middle-market firms, but it has recently gained popularity among all sectors as private equity carefully scales up the platforms of portfolio companies in a risk-off environment.
In the first half of 2022, add-on acquisitions accounted for almost 80 percent of the deal activity undertaken by buyout funds, according to data from PitchBook. In the middle market, both the value and number of add-ons as a percentage of all deals reached all-time highs of 73 percent and 63 percent, respectively, according to the most recent U.S. PE middle market report from PitchBook. The report noted that the add-on market has been especially active in industries such as healthcare, financial services, and information technology.
The article says that the growing percentage of deal activity devoted to bolt-ons suggests that that PE firms are becoming more risk-averse. In that regard, one of the advantages of these deals is that they allow the sponsors to engage in “multiple arbitrage” by averaging down the overall price multiples of the portfolio companies.
Twitter’s battle with Elon Musk has prompted a lot of discussion about the proper remedies for jilted sellers in M&A litigation. A recent article looks at that issue through the lens of the Ontario Superior Court of Justice’s 2021 decision in Cineplex v. Cineworld, in which the Court determined that the anticipated synergies associated with the deal should be included in the damages awarded to the target. The authors say that’s the wrong approach. Here’s the abstract:
What is the appropriate remedy when an M&A transaction fails to close because of the acquirer’s breach of contract? Even before the controversy surrounding Elon Musk’s proposed acquisition of Twitter in the US, this question arose recently in Canada. In Cineplex v. Cineworld, the Ontario Superior Court of Justice awarded $1.24 billion in damages based upon the target’s loss of anticipated synergies.
This article highlights the problems with this approach, including conceptual and reliability issues with calculating and apportioning synergies to one entity in a business combination and significant variation in the availability and size of damages depending on transaction structuring and the financial or strategic nature of the buyer or deal.
To avoid many of these issues and provide more consistent outcomes, we argue that courts should award specific performance, where feasible, or alternatively loss of consideration to shareholders as the seller’s or target’s damages. This latter measure best approximates the target corporation’s lost bargain and expectations, and has the least reliability issues.
Awards of expectancy damages to target shareholders in the form of lost consideration have faced significant challenges, most notably in the Second Circuit. In Consolidated Edison v. Northeast Utilities, (2d. Cir. 10/05), the Second Circuit held that, under New York law, a “no third-party beneficiaries” clause in the merger agreement was a bar to shareholder expectancy claims, because they were not parties to the agreement. However, as I blogged a few years ago, many commenters suggest that it’s unlikely that Delaware would take a similar approach.
This recent Pitchbook article makes the case that Adobe’s planned $20 billion acquisition of Figma may be a bellwether transaction for hot tech startups. The article suggests that the IPO slump may prompt more of these unicorns to pursue M&A transactions as an exit:
For now, 2021 valuations are still fresh in people’s minds. But the economy will suffer as a result of tight monetary policy, leading to a slowdown in growth rates. Under those circumstances, startups will be hard-pressed to hang on to last year’s valuations.
Bankers and venture capitalists are predicting that significant M&A deals will start taking place next year, but how many sizable transactions materialize depends largely on the state of the public markets. The longer the IPO window stays closed, the more likely it is that large startups would be open to being bought.
While it may take years to evaluate whether Adobe overpaid for Figma, other corporations may soon have a chance to pick up their favorite startups at more reasonable price tags. For their part, startups would do well to accept the market reality that 2021’s prices are not coming back anytime soon and consider striking a deal before the full impact of fiscal tightening becomes evident.
Of course, it’s all fun & games in tech-deal land until the antitrust cops show up. I’m sure other hot tech properties and potential buyers will keep an eye on how this deal – which involves direct competitors and raises antitrust issues that are more traditional than “hipster” – fares under their scrutiny.
Because a divested business’s infrastructure is often so intertwined with the seller’s other businesses, a divestiture buyer often needs the seller to continue to provide certain services to that business for a period of time after the closing. A transition services agreement is typically the mechanism used to identify those services & lay out the terms and conditions under which they’ll be provided.
This Deloitte memo provides an overview of some of the key issues that need to be addressed in order to ensure the effectiveness of a TSA. Here’s an excerpt discussing the need to identify the services that will need to be provided even before identifying a buyer:
Even without an acquiring business in place, a divesting firm can do its disentanglement evaluation and probable TSA planning. This allows for early negotiations about what services and levels it is prepared to supply and what it would cost for the parent company to provide those services. The teams will need to leverage functional blueprints to agree on the scope of services or processes to be covered under TSAs.
After a buyer is identified, the aim of both the entities should be to fix the scope of various services during the initial negotiations to provide both the entities clarity on the details of the services being negotiated. The final list of TSAs may differ from the original list as the buyer may have a substitute service/process already in place either in-house or through a vendor providing similar services.
In addition to review other planning-stage considerations, the memo also provides insight into how to determine the cost of the services to be provided and potential areas of friction that may arise during the negotiation process.
Antitrust regulators have been breathing fire about M&A in the past few years, but when it comes to their attempt to enforce their views, it appears that some courts think they’re blowing smoke. The FTC had its attempt to derail the Illumina/Grail transaction rejected by one of its own ALJs, and just a few weeks later, a D.C. federal judge denied the DOJ’s attempt to enjoin the UnitedHealth/Change deal. To cap off a very bad month for the regulators, last week, another federal judge rejected the DOJ’s efforts to enjoin U.S. Sugar’s proposed acquisition of Imperial Sugar.
The DOJ’s defeat in the UnitedHealth case – and the judge’s sympathetic views toward the defendant’s proposed divestitures and other conduct-based remedies – has some commenters wondering whether the DOJ might rethink its “no settlements” policy. Here’s an excerpt from Williams Mullen’s memo on the decision:
Whether the Antitrust Division will appeal the ruling remains to be seen. Perhaps more importantly, it also remains to be seen whether this defeat will cause the Antitrust Division to rethink its announced disinclination to settle merger challenges with proposed divestitures and other conduct remedies, instead proceed to trial seeking to derail the mergers in their entirety. The answer to this question – will the result in the UnitedHealth/Change case change Antitrust Division policy on how it handles merger challenges – could have significant implications for any parties contemplating mergers going forward.
Of course, antitrust regulators have had some notable successes with their hard-line approach, including, among others, Nvidia’s decision to abandon its proposed $40 billion acquisition of Arm earlier this year. My guess is that they’re unlikely to be deterred by recent losses – the DOJ has already announced that it plans to appeal the U.S. Sugar decision & is considering an appeal of the UnitedHealth decision. Right now, it seems more likely that, to paraphrase General Grant, antitrust regulators “propose to fight it out on this line” if it takes the next several years.